Can Olive Garden Stock Keep Going After Last Week’s 16% Pop?

A strong quarterly report sent shares of Olive Garden parent Darden Restaurants (NYSE: DRI) sharply higher last week. Darden stock rose 15.9% for the week after closing out fiscal 2018 in hearty fashion. It also didn’t hurt that it boosted its quarterly dividend by 19%, giving income investors another reason to pull up to the restaurateur’s table.

Total sales from continuing operations rose 10.3% to $2.13 billion. There was a 2.2% increase in comps for Darden’s legacy brands, as all seven of its legacy concepts clocked in with positive results. The only laggard was Cheddar’s — the chain it acquired in a $780 million transaction last year — with its problematic 4.7% decline in comps.

Image source: Olive Garden.

Bread sticks

Adjusted earnings per share rose 18% to $1.39 for the fiscal fourth quarter, fueled in part by aggressive share buybacks that have reduced the outstanding share count over the past year. Actual adjusted net income inched 17% higher for the period.

Olive Garden continues to be the key driver here, and that’s a good thing as the casual Italian chain has now rattled off 15 consecutive quarters of positive comps. Olive Garden accounts for half of Darden’s sales. LongHorn Steakhouse is a distant second — with the other six concepts still too small to move the needle — and the casual steakhouse chain is working on an even longer streak of positive same-restaurant sales growth.

Olive Garden is growing by focusing on simplification. Its promotional activity is trying to drum up more visits from its core customers, relying less on menu changes to smoke out new customers. Olive Garden is also keying in on take-out and delivery sales. Off-premise sales have risen 9% over the past year — more than double the growth for its eat-in revenue — accounting for nearly 14% of the chain’s business.

Wall Street ate up the strong report. At least nine analysts juiced up their price targets, and one of them also upgraded the stock. Darden’s own guidance for the new fiscal year is encouraging. It sees earnings per share from continuing operations of $5.40 to $5.56 in fiscal 2019, up from the adjusted profit of $4.81 it just rang up and the $4.02 it delivered in fiscal 2017. It sees sales growth slowing to between 4% and 5%, but that’s largely the handiwork of Cheddar’s already in its system for more than a year. Darden’s targeting 1% to 2% in comps growth, and opening another 45 to 50 eateries this new fiscal year.

Wall Street’s no longer tossing out the “restaurant recession” term. There are too many chains like Darden growing in this climate, more than holding their own in terms of in-store traffic and killing it thanks to the emergence of delivery services redefining what hungry patrons can get at home or at the office. Things aren’t perfect at Darden. Cheddar’s remains a challenging integration. However, with Darden hitting new all-time highs last week and several Wall Street pros pushing up their price targets, the bulls should continue to be the ones feasting on gains.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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